DRESDEN, Germany, Oct 7 (Reuters) - German Chancellor Angela Merkel urged her conservatives on Saturday to forge a three-way alliance with the pro-business Free Democrats (FDP) and the Greens, her most explicit backing yet for the so-called "Jamaica" coalition.

Merkel, who won a fourth term in the Sept. 24 election but bled support to the far-right, needs to form a coalition. The "Jamaica" alliance, named for the black, yellow and green party colours which match Jamaica's flag, is her most likely path to a parliamentary majority.

Merkel also said a special party meeting should be held to let members of her conservative Christian Democrats (CDU) discuss and vote on any coalition deal.

She told the youth wing of her party in Dresden that members should concentrate on talks that lie ahead, first within the conservative bloc between the CDU and its CSU sister party from the state of Bavaria, and then with the FDP and Greens.

Aside from internal differences in the conservative camp, especially on migrant policy, the three blocs that would form the Jamaica coalition are at odds on energy and climate policy, tax and Europe.

Yet in a marked shift, Merkel made clear there were no other realistic options. She closed the door on another tie-up with the Social Democrats (SPD), her coalition partners for the past four years, who have announced their intention to go into opposition after slumping to their worst post-war result.

"It is clear that the Social Democrats are not capable of being in government on the national level in the foreseeable future, so I advise us all to waste no time thinking about that any more," said Merkel.

If Merkel is unable to form a "Jamaica" coalition, the prospects of a minority government or even new elections loom, an unpalatable scenario for investors who are already spooked by months of uncertainty ahead.

CRUNCH TALKS WITH CSU

Merkel's first task in building a coalition comes on Sunday when she meets the CSU to agree common positions, most notably on migrant policy, before starting exploratory talks with other parties.

The CSU, which has served as sister party to the CDU for decades, fears heavy losses in next year's Bavaria election and is digging its heels in over a demand for a cap on the number of refugees. Merkel says a cap would breach the constitution which guarantees asylum to politically persecuted people.

Merkel, who left Germany's borders open to 1 million migrants in 2015, acknowledged her handling of that crisis had shaken the relationship between the CDU and CSU, and took responsibility for election losses because of her decision.

Most of the migrants who arrived two years ago entered Germany through Bavaria.

Merkel implored both parties to compromise, saying the parties' deal to live with their differences and fight the election together this year had meant they had won.

"I will do everything I can to move this forward.. With good will, that is possible," she said.

The conservative youth wing on Friday agreed on a "Dresden declaration" calling for change after the heavy election losses. While it stopped short of the CSU's demand for an upper limit on migration, it rejected "uncontrolled" immigration.

On euro zone reform, Merkel sounded sceptical on the idea of a finance minister for the currency zone.

"A finance minister will only be appointed if a finance minister is necessary," she said.

The FDP has said it could not agree to a euro zone budget that would help redress economic imbalances within the bloc. (Writing by Madeline Chambers; Editing by Clelia Oziel and Peter Graff)